What Can We Learn from the Government?

Speech to the Tribal Economies Forum of the First Nations Futures Program, Christchurch: 23 February 2008 (Revised)

Keywords: Governance; Maori;

Tena kotou, katoa.

Thankyou for the invitation to speak to you on tribal economies. It would not, however, be appropriate for me to tell this audience how to run their tribes. What I thought is I could usefully do is to help you think about the issues which you face by describing the development of thinking about the running the New Zealand government.

My introduction to the topic began when I was in England in the 1960s, and one of my students wrote a thesis on the governance of British Rail. Up till then, at about six to eight month intervals, the British government had given the railways a direction on what might be expected of it. Each time it was different. One occasions it might be they wanted it to make a surplus to pay to the government accounts; a little later it might decide they were to invest to improve the national transport infrastructure; but then British Rail would be directed to restrain prices as a contribution to inflation; followed by to take on labour to reduce unemployment; and then there would be a direction to assist regional development in failing areas; not to mention to upskill the labour force; then to cut back railway lines to run a more efficient operation; by around which time the entire cycle would repeat itself.

Of course the conflicting directions arrived so quickly one after another, that they were never fully implemented. Indeed, nothing got implemented properly at all. More fundamentally, those running the company could never be held to account – since they could always draw attention to one of the list of objectives that it seemed to be fulfilling – and so they ran the nation’s rail service for their own purposes and not in the social interest.

I don’t know of any similar study for a New Zealand State Owned Enterprise, although they too were subject, especially in the 1970s, to conflicting directions.

This led to a major review of the role of SOEs in the 1980s, and an entirely new framework. Basically each was required to behave as if it was a private business, including paying taxes in the same manner. The government gave each business considerable operating independence. It put them into the legal structure of corporation, whose shareholders – the government – appointed the board, who had mainly business experiences, and told it to run the company with the purpose of making a profit, the dividends from which were to be remitted to the exchequer.

This sounds relatively straight forward, although there are some economic subtleties. In particular, while the profits contribute to the government accounts, there was an economic theory which said that businesses using resources – which includes labour – to make the best long run profit they can, contributes to the nation’s economic welfare by providing the goods and services it wants as efficiently as possible.

Actually the theory only applies under certain circumstances. Mostly, the actual circumstances are near enough to the theory for some sort of outputs – such as education, health and the media – the theory does not apply at all well. And it does not apply where the business is a monopoly. I shall talk about the first group shortly, but because the reservations about monopolies don’t generally apply to tribal businesses, I wont discuss them further.

Even for those businesses which fit the model there are some complications.

First, there may be side-constraints imposed on them. For instance, SOEs are required by law to be good employers, and they are expected to act ethically. These are, of course, not requirements of private businesses, although many would argue it was in their best interests to do so.

Second, most large private businesses make donations from their surplus to worthy causes. While this may be thought of as ethical, it happens that the grants are usually targeted to increase the public profile of the business and to improve employee morale. There are various rules about just how much and to whom a corporation can donate, and SOEs stick to them scrupulously.

Third, sometimes the government may want SOE to do something which reduces the SOE’s profitability. In such cases it pays the SOE to carry out the task rather than directing it to carry out the required end. An example was a subsidy paid to keep the Canterbury-West Coast railway line open. Of course the government can do exactly the same to a private business if it wants.

Why does it not give a direction to its SOEs and take a lower profit? It could. But this way the action is transparent. Parliament knows that its SOEs are maximizing profits – that is what parliament legally requires of them. But the subsidy is an item in the statements of public expenditure, so parliament can debate and scrutinise the propriety of that subsidy.

The dividends from its various SOEs go into the general funds which parliament spends. If a particular area – say education – is decided to be a priority then perhaps more of the funds go into that area. However, there is no generally earmarking of funding sources and disposal so one cannot tell whether the surge in spending in a particular area is the result of increased dividends from the SOEs.

I have already mentioned that there are production units whose situation is such that the assumptions of maximising profits in a competitive environment, do not apply. They include hospital, social service delivery, universities, schools, the media, the conservation estate, research establishments and of course the core public service itself. I’m afraid there is no simple coherent theory to tell how to manage these entities. Usually because there is no simple summary of their output performance.

The government requires that they use resources as efficiently as possible, and that they make a surplus which contributes to their reinvestment needs. After this the framework gets murky. Sometimes they are set up as business entities sometimes they are not. Sometimes the government requires them to run as if they are businesses – as it did with hospitals and research institutions in the 1990s; sometimes it does not – the current government reversed the requirement in some cases when it came into power in 1999. Basically it is all a muddle, mainly because once the purity of the business in a competitive environment is disturbed, there are no simple rules of governance.

Tribes need to be aware of this. They will have commercial investments but they may also run hospitals, schools and other service delivery entities. It seems to me that the best hope one has of doing this well is to understand the rigorous theory of businesses in competitive markets, and temper it with an understanding of the differences of public service entities together with commonsense.

Local authorities appear to have a variation on this governance structure from the central government. Typically each sets up a separate committee or board to manage all the council’s commercial investments including those for which there may only be partial ownership. The committee typically consists of elected representatives together with people with business and investment skills. The aim is to consolidate the business experience available to the council to manage its commercial investment, while maintaining some independence from the council proper and yet being accountable to it. The equivalent task in central government is managed by the Treasury which has a division called CCMAU – the Crown Company Management Advisory Unit – which has its own minister of State Owned Enterprises.

Where the government is primarily a commercial investor, and not an owner of the asset, as in the case of the New Zealand Superannuation Fund, it also appoints an investment board, gives them some guidelines – typically about ethical investment, the time horizon and the degree of risk – and lets them get on with the job.

If the government were ever to interfere in a manner which a board thought was inappropriate, it would have to do so transparently – hard copy – and would run the risk that the board (all or in part) would resign expressing their view of the inappropriateness of the central involvement.

Occasionally there have been kafuffles, but not often, given the number of boards there are and that the policy has been running now for almost two decades.

While this broad system I have just described is widespread and widely admired, it is not universally accepted. There are two common complaints. One is that is that the control of the publicly owned assets is not democratic; the other is that the SOEs sometimes take actions which are against the social interest. I cannot fully disentangle the two criticisms, but I’ll try.

First, the arrangement is democratic in the sense that the system has been implemented by parliament (or a council) via a democratic process. In the course of doing so, the deliberative body has decided not to avail itself of some of the interventions that are in principle available to it, Parliament does this more than you might think. For instance it has the power to behead anyone who criticises the government. But it choses not to use this power because it does not think it is in the best interests of the nation.

There is another sense in which the arrangement is democratic. It is transparent. That is, both parliament and the public at large can see what is going on, while those that make the decisions are accountable to parliament and ultimately to the electorate.

Why people argue the system is not democratic is, I think, that it does not always do what they want or what they think the public want. That is their second complaint: that the SOEs do not act in the social interest.

But do businesses – not just SOEs – act against the social interest? I skip over here a discussion on what is the social interest, or even whether there is an agreed social interest, instead assuming that there is a well established one.

In order to understand the debate, it is necessary to rehearse some history of ideas. The nineteenth century saw the evolution of great corporations which were both awe inspiring in terms of what they could produce and how efficiently they did it, but troubling in that they sometimes wrought destruction of the social fabric in their societies.

Among the proposed solutions to this tension was cooperative ownership either by the workers or suppliers or consumers. On the whole this is not relevant to tribal business. An alternative or complementary strategy was the public ownership of business.

Because it reflects what we knew then rather than what we understand today, the public ownership of industry is a very nineteenth century solution, even if there are many people who believe to this day that social ownership is the only way to control large firms. Few of them acknowledge, however, that public ownership can be a very ineffective way of running a business – as we saw with British Rail. Nationalising it is the easy bit: how to run it once it is nationalised is a much more difficult.

In the debate about national versus private ownership, it is often overlooked that ownership is only one means to an end. What we really want is the social control of industry: that businesses do what society wants of them in the pursuit of its social goals.

What economists discovered, as I have already explained, is that under certain conditions businesses in competitive markets contribute to a the social goals of a liberal society. The corporatisation reforms of the 1980s were the implementation of this approach, although sadly the extremists forgot the caveats of those certain conditions and applied the principles in circumstances where market conditions did not justify treating the entity as simply a business in a competitive environment. Moreover often the privatisation they enacted was unnecessary and inept.

The analysis never said that what is good for business is good for society, as the extremists were wont to argue.. Those particular conditions, and the market competition, have to exist. Moreover, the analysis does not mean that businesses never harm some people sometimes. They do. Price rises hits pockets, especially of the poor; seeking efficiency leads to layoffs of workers.

At issue is what other measures we might take if such things happen. Do we adjust the incomes of the poor as prices rise? Do we offer effective redeployment schemes when workers are laid off? Perhaps what the critics of the current SOE regime should be saying is that we dont always have adequate protection schemes for the affected. To go on to argue that the businesses should not take actions which are damaging, leads down the track that derailed British Rail.

Perhaps I have been a bit indulgent in elaborating this issue, because typically a tribe is not so big in the economy that it has to worry about its impact on the nation’s economic performance. (Sometimes it may be so big in a locality, though, that these issues crop up – what if it owns the major employer in a town?) The point of my indulgence is to emphasise that prudent investment in appropriate businesses benefits both the investor and society as a whole. But by itself that is not enough.

What might a tribal authority learn from all this in regard to its commercial activities?

First, transparency is a part of democracy. Maoridom has moved a long way from the direct democracy of pre-European times in which their communities lived in small intimate units which debated vigorously on the marae and made decisions based on consensus. Today’s tribes are too big, and people’s interests too complex and diversified to do that any longer, even if one could replicate the marae debate.

But second, process is also a part of democracy and economic efficiency. Managers have to be given the space to carry out the complex tasks asked to them without excessive interference by the democratic process.

That suggests that there is merit in the local body arrangement of a separate investment committee which is responsible for the management and oversight of all the tribe’s commercial investments but which reports to the highest board of the tribe.

Sometimes the committee will be a passive investor, simply holding (and shuffling) its portfolio of investments in order to make a return; sometimes it will hold land in the portfolio which it leases out; and sometimes it will be an active investor in that it will need to make decisions about who should be appointed to the company and what should be expected of them.

There are a series of financial decisions to be made here, like how much should be borrowed to fund the investments, questions of responses to takeovers, how much will be remitted in dividends and so on. The upshot is that in most years the investment committee will remit an dividend to the supreme board, which will use it for pursuing the tribe’s wider purposes.

All this is but normal business practice, except that the tribal committee’s actions will be much more transparent than occurs for most private businesses.

Not all the entities are likely to be covered by this committee if the tribe is also running hospitals and schools and social service delivery. Another board to supervise them would be appropriate, but this time with experienced public sector managers rather than business people. (one or two of the latter may be appropriate and certainly at least two of the board members should be able to read accounts.)

I want to turn to the difficult question of whether any of these entities should give preference to people from the tribe that owns them. This is an example of what is generally called ‘nepotism’. You can tell from the origins of the word that it is a universal issue and one can easily cite many Western examples of the practice. Most would suggest that while it was beneficial to those involved, it has not been necessarily beneficial to society as a whole, nor frequently to those who own the entity.

Maori have a term ‘whanautanga’. It is for them to explain the term and describe the extent to which it differs from nepotism. The only thing I would say here is that as iwi size increases, the meaning of whanautanga may change.

In regard to employing relatives, my general advice is there is never any substitute for competence – no substitute for the best. However, I acknowledge the principle that was popular in the enlightened part of the public service some forty years ago that where there was two candidates of equal ability for a job they chose the woman, because they knew that getting there was much tougher for the women so she actually was the better candidate. That may be true for members of your tribe.

I would particularly caution against nepotism where the funding is from government for, say, social service delivery. Because it is particularly difficult to define the desired outcomes of such contracts, funders will look at the inputs and production relations. While sometimes it may be that the best person for the job is a relative, nepotism sets up a prima facie case that the internal arrangements are not efficient, and the funder is not getting sufficient of the agreed outcome. The reputation of much excellent Maori social service delivery was damaged by a few poor deliverers who recruited their families and failed to deliver.

The one area where a tribe might want to give preferential recruitment is in a strategy to upskill its people. It is likely to spend a significant part of its surplus available for pursuit of the tribe’s wider objectives, on encouraging its young to upgrade their educational and vocational skills. Why not then use a tribal business to do so too?

My answer is not so much to ask why not, but to ask how? To give a practical example, a couple of decades ago a number of iwi bought government hotels with the intention of taking on their mokopuna at the lowest levels and then, as they learned the ropes, they would take over from the existing staff thus upskilling the Maori labour force with on-the-job training. I dont know how successful the strategy was – I hope it included a component of formal training too. But in principle it seems a sensible strategy for an iwi to use its ownership of physical capital to leverage human capital. That happens in lots of Pakeha life too.

But what is the best way to do it? Particularities – including no doubt tax law – will be important so I want to just make two general points which summarise the theme of this paper.

First, any direction to an enterprise to do this, or indeed to do any other task, should be explicit, stable and transparent. If they belong to a democratic institution, the members tribe deserves to know what is being done on their behalf.

Second, the direction should give those implementing the task the responsibility to manage it. Certainly they should be held to account for their performance, but there should not be micro-direction from above.

These, of course, are the basic principles which underpinned the moderate elements of the reform in the governance of the New Zealand government which were introduced in the 1980s. It seems likely that their application will serve tribe’s people as well as they have served the people of New Zealand.